COVID-19 has made us realise how much we took for granted; drinking a coffee in a cafe, hugging your parents, packing for a holiday and for many, simply earning a monthly wage.
The truth is, life is uncertain. No one is invincible and anything can happen. It’s got me thinking about safeguarding mine and my family’s future against those awful ‘what if’ situations. As a parent, losing an income would affect so much more than before. Financial stability has never felt more important.
This is where income protection insurance comes in. It is a life insurance product that is basically designed to cover a percentage of your salary (usually around 50-70%) if you become too ill or injured to work. Let’s talk a little more about how it works…
How income protection works
Income protection is designed to allow you to continue paying essential bills such as your mortgage or rent payment if you cannot go out to work due to long-term illness or injury. When you make a successful claim, your policy will pay out regularly until you can either go back to work, until the policy term ends or you retire or pass away. You can also claim more than once on a single policy, if you are unlucky enough to need to!
If you are employed, you may be eligible for Statutory Sick Pay (SSP) which, whilst very helpful, is not an awful lot of money. It might not be enough for you to continue living relatively comfortably. Relying on an income protection policy instead is a weight off your mind when you need it most, so that you can focus on getting better.
Income protection for the self-employed
A lot of people reading this will likely be self-employed. If so, income protection is even more important! As a self-employed person, bringing money in is all on you. You don’t have things like sick pay, maternity leave and pensions to rely on. If you become sick, the bills will remain.
Obviously, the benefits to being self-employed are countless, however it is important to put provisions in place for when you need to take time out. Factoring in income protection to your business plan is a really good idea. You can ensure that your family can still get by without your income.
When self-employed and taking out an income protection policy, your monthly income is based on your share of the pre-tax profits generated by your business. The amount of cover that you’ll need depends on the size of your mortgage and whether you have taken out any loans to build up the business.
Your policy may also have a deferral period to factor in. The deferral period is a period of time that must pass before those regular payments begin. This could be four weeks, or four months – or more. You decide when you take out your policy. The longer the deferral period, the cheaper the premiums. Make sure you have money to fall back on during this deferral period where you will be unable to work, but won’t yet be receiving your payout.
It’s always a good idea to try and keep a few months worth of earnings tucked away for emergencies anyway – self-employed or not. That way, you’ll never be without funds and life can continue ticking over as normal for your children.
Is income protection expensive?
There’s no average price for income protection, as it totally depends on you and your individual circumstances; your salary, your health, the amount of cover you’d like. Premium prices are based on your age, marital status, whether you smoke or have previously smoked, your lifestyle (such as whether you have any high-risk hobbies), the deferral period and the amount of cover you choose.
As for choosing how much cover to take out, you probably want at least enough to cover the mortgage/rent payments and your bills at least. Consider day-to-day living costs too though. If you aren’t out at work and are at home more, you may need to spend more on food, utility bills and internet usage.
Income protection is the life insurance that every working person should consider. After all, are you more likely to pass away before retirement, or become seriously ill or injured? Probably the latter. Income protection is definitely worth a bit of your monthly investment!